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Giving to a Newborn’s College Savings Plan

Expensive colleges like N.Y.U. could cost more than $100,000 per year by the time today’s infants are attending.Credit
Ángel Franco/The New York Times

The best gift any of us can give to newborn babies is to point their sleep-deprived parents in the direction of a good 529 or other college savings plan and then seed the account with a little bit of money.

It was hard to avoid this conclusion in the midst of a recent baby boom among money writers at The New York Times. Tara Siegel Bernard, a personal finance reporter, recently delivered her first child, and Paul Sullivan, the “Wealth Matters” columnist, welcomed his second.

I wanted to get both babies a little something, but knowing what I know about how much four years of college will cost, I couldn’t in good conscience send a stuffed animal or a security blanket.

You would think that the state-sponsored 529 plans around the country would be welcoming givers like me who want to take this sort of initiative. But the process of tossing some money into an account is not as easy as it could, or should, be.

The hassles have given rise to several registry services that let you use credit cards to pay for a 529 gift and spare you the need to contact the plans or the parents. Recently, however, the industry group that represents 529 plans and the companies that serve them raised questions about whether the start-ups were violating securities laws.

Why would they do such a thing, when the services seek only to collect assets to deliver to the 529 funds on a silver platter? To figure out the answer, it helps to start with a bit of refresher on how the 529 plans work.

Anyone can open an account for himself or herself, or for someone else. States run the plans, and you can set up an investment account that allows you to choose among various mutual funds.

Money in these accounts grows tax-free, and you can withdraw it without paying any capital gains taxes as long as it’s used for educational expenses. Moreover, a majority of states offer income tax deductions or credits when people deposit money.

This is all nice and will become more so if our tax rates rise in the next decade or two. And the earlier you start, the more the money has time to grow (and the more you save on taxes).

The “Cost of Waiting” calculator on BlackRock’s Web site illustrates this nicely. Assume that college requires $40,000 today per year and that the cost will increase 4 percent a year for the next 18 years.

If you assume that you’ll earn a 6 percent annual return on your investments and that your child will need just four years to finish college after starting at age 18, you’d need to save $444 a month to pay for 50 percent of the bill, if you start saving when the child is born.

Wait just five years, however, and you have to save $731 a month to reach that same goal. (There’s a link to the calculator from the online version of this column, so you can enter your own numbers.)

A college that costs $60,000 a year today could very well cost close to $500,000 for four years once today’s newborns enroll if the costs rise at an annual clip of 4 percent.

So parents, forget about the fancy layette sets. Open a 529 account and register for cash gifts. Upromise offers a service called Ugift in eight states where the Sallie Mae unit helps runs 529 plans. About $42 million in gifts have arrived since 2008. AllianceBernstein even has a feature that lets you put money into someone’s 529 account via a direct debit from your bank account.

Photo

Credit
Robert Neubecker

Unfortunately, few new parents register or think to ask friends for 529 money, even my fellow travelers here at The Times. And even if you know what state your friends send their 529 money to, you may not be able to easily send money there yourself.

I knew Mr. Sullivan had a 529 plan in Nevada, so I called the plan’s toll-free number, credit card in hand, hoping that I could tell the company the child’s name and deposit some money. But the phone representative told me that such a thing was not possible for security reasons, even though I didn’t need or want any of the child’s account information. In fact, I was prepared to hand over my own bank account number just to complete the task.

Why wouldn’t the state let me give this way? “The last thing we want to do is not take your money,” said Jeff Howkins, president of Upromise Investments, which helps run this particular plan. “We have looked at how we could modify it from time to time, but part of the value proposition we’re selling is compliance and controls.”

So I’m stuck writing a check to the Nevada plan, pestering the groggy Mr. Sullivan for his account number, writing it on the memo line of the check and then dropping the check in a mailbox.

Considering the rigmarole, you can see why entrepreneurs at sites like Gradsave, FiPath, GiftofCollege and GiveCollege have all piled in to try to make giving easier. They allow anyone to give money to anyone else’s plan, no matter where it is.

I experienced a few hiccups testing the sites this week, but it’s the 529 industry’s response to the gifting companies that seems most noteworthy. In February, the College Savings Plans Network, an industry group, issued a hyperventilating statement accusing the start-ups of all sorts of things.

The group raised concerns about the fees the new companies charge, usually a handful of dollars a gift. I buy GiveCollege’s argument, however, that this is the rough equivalent of sales tax or shipping that you’d pay for an alternative gift.

Then, the 529 network warned that “these services don’t always have the best track record of ensuring the appropriate contribution is made, leaving it to you to police your account.”

That sounds an awful lot like an accusation of outright theft. But Mary Anne Busse, a chairwoman of the group’s legal and regulatory affairs committee, said that it was only meant to refer to the fact that two members of the organization tested the start-ups and that those tests did not result in the proper crediting of donations. “We’ll take a look at our statement and evaluate whether we want to update that,” she said. “We’re not suggesting that every aggregator is taking money or being careless or negligent.”

That said, it did send a cease-and-desist letter to GiftofCollege questioning its solicitation of contributions that it directs to 529 plans. The implication — that the company might be illegally acting as a broker of securities — led the company’s founder, Wayne Weber, to temporarily close the site to new gifts and team up with a brokerage firm to ensure that regulators could not accuse him of breaking any rules.

“Companies like me, in my opinion, are not supposed to be the ones depositing funds into an S.E.C.-regulated fund,” Mr. Weber said. “I completely shut it down because I thought, for me, that we needed to make sure we were staying in compliance.”

The Securities and Exchange Commission did not want to comment on any particular company, given that specific facts can make judgments like this a close call. But David W. Blass, chief counsel for the division of trading and markets, wrote in an e-mail that generally “the hallmark of being a broker-dealer is the receipt of a commission or other transaction-based compensation in connection with a securities transaction.”

Oddly, neither the industry group nor any of its members chose to send a cease-and-desist letter on this topic to Gradsave, which is a larger operator. And Gradsave has a different view of the law.

Marcos Cordero, the site’s co-founder, said he believed that its processing fee was neither a commission nor “transaction-based compensation.” He said that when Gradsave handed money over to a 529 account, any securities transactions occurred inside of that account according to the wishes of whoever controls it. “Gradsave is not effecting or participating in that underlying securities transaction,” he added by e-mail.

I had not anticipated starting the week thinking about baby gifts and ending it with S.E.C. lawyers. And if any whiff of regulatory uncertainty makes you uncomfortable, you may be stuck waiting for the newborn’s parents to open an account and give you the account information so you can give directly.

Still, it’s ultimately for the good that industry outsiders are making the 529 plans a little uncomfortable. Here’s hoping they respond by making gift-giving more seamless and convenient.

A version of this article appears in print on September 1, 2012, on page B1 of the New York edition with the headline: Giving to a Newborn’s College Savings Plan. Order Reprints|Today's Paper|Subscribe